Bucking Stagflation

Now is the time for a little game of good news, bad news. First, the bad news:
The United States is likely heading for a recession. More bad news: This recession
probably isn't avoidable, and the Federal Reserve almost certainly can't get
us out of it.

It's not that the Fed doesn't have the tools to keep the US economy out of
recession; quite the contrary. Instead, they lack the political willpower to
employ those tools. That is to say, politicians in Washington lack
the will to support the Fed's use of its tools.

Let's face it, the American people don't want to see a third round of quantitative
easing. They simply won't stand for it. Politicians, being politicians, know
that they won't be reelected if they allow the Fed to open the spigot with
QE3, let alone if they support such a move.

In addition to lacking the will, the Fed quite frankly lacks the competence
to employ its tools effectively, as it has clearly demonstrated over the past
five years. To those democratic readers, count those years carefully; this
isn't an attack on Obama - not that he doesn't deserve it - but on one of the
least competent Federal Reserve Chairman in American history (right behind
Alan Greenspan), Ben Bernanke.

How incompetent does the most powerful banker in the world have to be to employ
two rounds of quantitative easing, PLUS the Fed's normal open market operations,
PLUS a prolonged policy of cheap money (read: sub-2% target Fed Funds Rate),
and STILL not have jumpstarted the domestic US economy?

Still reading? Good, 'cause it's time for the good news! Well, let's say better news.

It's more likely than not that at this point in time, the United States is
already in recession. While this hasn't been reflected in last quarter's GDP
numbers, it probably will be once those numbers are revised - especially if
the revisions to the numbers for first quarter, 2011 are any gauge.

Not only is the United States already in recession (great news, I know), but
the economy isn't likely to get a whole lot worse, except for an uptick in
unemployment, which should be negligible because unemployment is already high.
So while the economy probably won't feel much worse than it already does, this
slow patch will likely continue until closer to the 2012 elections, which brings
us back to the Fed.

Lately a number of Republican nominees have been hopping on Ron Paul's Fed-bashing
bandwagon - Perry and Bachmann to be specific. Their comments (e.g. Perry's
quote that Bernanke printing more money could be considered "treasonous"),
as well as responses from Obama and his White House staff, have brought to
the forefront a fundamental question concerning the Federal Reserve: Is it
independent, or ain't it?

After all, if the Fed isn't independent, that would mean that it is just like
any other government agency, and fair game for politicians to attack, defund,
debunk, etc. If it's not independent, there should be some degree of transparency
for the American people to know and understand how and why the Fed is acting
in their best interests. There should be supervision and someone within the
federal government held accountable to such a standard.

If, on the other hand, the Fed is truly independent, as Obama says, then the
federal government has a regulatory obligation to ensure that the Fed is acting
legally, as is the case with any other corporation. So we must ask: Where are
the audits? Where is the supervision? Who is charged with prosecuting Fed officials
who act illegally? So many questions, so few answers.

The fact is that the Fed is indeed independent. It's not a government agency,
but a private institution, just like GE or IBM. The Federal Reserve, created
by the Federal Reserve Act (pretty redundant, right?) of 1913, is owned by
some of the world's largest banks, and controlled by them.

In fact, the only input the government has, so far as the Fed is concerned,
is Senatorial confirmation of appointed Chairmen of the Federal Reserve (and
that is done pretty much out of courtesy, so politicians can pretend they have
some power over this otherwise opaque organization).

In every other aspect, the Fed is almost totally nontransparent, just as GE
or IBM. There are, however, a few key differences between the Federal Reserve
and other private corporations. First and foremost, other companies don't have
control of this nation's monetary policy - kind of a big thing.

Big difference number two: other companies tend to be regulated by the government
in some way, shape or form. Companies are usually audited regularly, and their
operations are scrutinized, as are their products. The Fed faces no such scrutiny;
hardly any oversight in fact - mostly because politicians are scared of the
organization.

To summarize, when it comes to the Fed, don't expect any help. The banks controlling
this organization are focused on their own profit, and the interests of the
big banks are increasingly at odds with those of the American people.

So, despite the Fed's "best efforts," the US economy has slowed back down.
To add to this stagnation, recently released numbers (Producer Price Index,
or PPI) have shown a marginal increase in prices. Plus, money supply, as measured
by M3, is finally growing again.

Let's wrap up this week with a quiz: When the economy is slow and prices are
rising (due to expanding money supply) what does that mean?

Answer: It means stagflation - and usually a new president in very short order.
Welcome back, Jimmy Carter. The question now is, who will be our Ronald Reagan?

Dock David Treece is a partner with Treece Investment Advisory Corp (www.TreeceInvestments.com)
and is licensed with FINRA through Treece Financial Services Corp. He provides
expert content to numerous media outlets. The above information is the express
opinion of Dock David Treece and should not be construed as investment advice
or used without outside verification.